British Defence Secretary Philip Hammond announced establishment of a specialized organization to purchase defense equipment and support. (Agence France-Presse)

LONDON — The British Ministry of Defence has scrapped controversial plans to hand management of its £14 billion (US $22.9 billion) a year defense procurement effort to the private sector, and instead is setting up what it calls a bespoke central government trading entity based on the present equipment and support organization to buy hardware and services.

Defence Secretary Philip Hammond told Parliament Dec. 10 that the government would set up the new organization starting in April with current Defence Equipment & Support (DS&E) boss Bernard Gray as the chief executive.

Hammond said the new organization would procure private sector expertise through a series of support contracts to deliver “key changes to systems and processes and to strengthen program management while organic capabilities are built.”

Questioned by ex-Defence Procurement Minister Peter Luff about the areas where external business partners might play a role in the revamped DE&S, Hammond said “what we envisage in the DE&S plus model is probably three separate contracts; one to provide us with program management support, a spine for the organization; one to provide us with HR support, an area of particular weakness in DE&S; and a task-and-finish project to install some additional financial control systems within the organization.”

An MoD spokesman said the new entity is an “arms length body working within specially agreed rules that are different to those used by the rest of the civil service.”

The new organization will be accountable to Parliament and have its own board and an independent chairman.

The Labour opposition party labeled Hammond’s statement an “embarrassing U-turn”.

The new organization is being exempted from normal Treasury rules so it can recruit and reward staff along more commercial lines than is currently allowed under civil service rules.

The MoD said it had only shelved its preferred proposals for a government-owned contractor-operated (GoCo) scheme, and that they could be revived following following the 2015 general election.

Despite recent improvements in performance, the British have been looking to radically change the way they procure and support the military here after years of lengthy delays and cost overruns to major equipment programs.

The procurement changes are part of wider transformation plans being pushed by the government, including handing over responsibility for budgets to the individual service chiefs.

The GoCo scheme, of which former businessman and journalist Gray was the architect, was the government’s preferred option to provide the skills and expertise missing at DS&E.

The decision to halt the GoCo work was taken after one of the two final bidders for the management contract withdrew in November, leaving only a Bechtel-led consortium called Materiel Acquisition Partners (MAP) in play alongside an in-house proposal known as DE&S Plus.

Hammond told Parliament that the withdrawal of the CHMHill2-led consortium meant the MoD did not have a competitive process and the “risks of proceeding with a single bidder are too great to be acceptable.

“I have, therefore, decided to build on the DE&S Plus proposition, transforming DE&S further within the public sector supported by the injection of additional private-sector resources ensuring that the organization becomes “match-fit” as the public sector comparator for a future market-testing of the GoCo proposition,” he said.

Hammond said Bechtel had already expressed an interest in bidding for the support contract work.

A spokesperson for Bechtel signaled the company’s ongoing interest in procurement transformation but said the MAP proposals for the GoCo would have saved the MoD billions of pounds to reinvest in new equipment .

“MAP submitted a comprehensive proposal to transform UK military procurement. We were confident this would have generated billions of pounds of savings for the Armed Forces to invest in new equipment. It is obviously disappointing that the other team’s withdrawal at this late stage has led to a collapse in the competition. However, we remain committed to exploring with MoD how best we can contribute to future reforms,” said the spokesperson.